Saturday, 10 October 2015

Actively Managed RRSPs – the biggest scam on planet earth

QUESTION:
Why, would the vast majority of Canadians and the rest of worldly investors,
willingly give up 40-50% of their profits, to financial money managers, over
the lifetime of their RRSP/retirement investment timeline ?

Why indeed ?

If you’re
like me, you sat down with your investment manager [in my case, from a Canadian firm we will call
'Investor' Company for the sake of argument] and at some point, I asked him, “so how do you make your
money here ? “ He promptly replied, ” in the case of this specific fund, we
charge 3.2% of your profit.

I thought to
myself,

$3.20 for every 100.00 dollars
profit I bring in (gross),

is actually really good…

These guys are not the grubby greedy snakes I presumed !

GREAT !

And thus, the conversation ended, with a smile on his face.

What I found
out years later, was this ‘charge’ is called a ‘Management Expense Ratio (MER)

So, ten
years went by, and eventually I was wondering, why my tens of thousands, didn’t
seem to be making that much money, despite my 9 -10 % returns…especially
considering, that I was only being charged 3.2%, a paltry sum…

Except it wasn’t just 3.2%…. Three dollars & twenty cents for every
$100.00 in profit….

It was and is the FIRST 3.2%

Allow me to explain.

----

For
simplicity sake, let’s say our funds MER is 2.5%. I invest a bunch of money and
end up making a gross profit of 5% (5% which works out to $1,000.00)

ABC
Investment Corp will take their 2.5% MER right off the top, leaving me with the
remaining 2.5%....of my initial 5% …..

Confused ? You should be…

It’s not
$2.50 for every $100.00 profit, it’s the
FIRST 2.5% of my 5% I made !

THIS, is the industry’s dirty little
secret.

And just
what percentage, is 2.5% of 5% ?…….You
guessed it, 50%

--BIG LIGHTBULB COMES ON –

Why would
anyone give up 25/30/50% of their profits to an investing company/guru ?

Remember
that $1,000.00 gross profit I made ?Well, it’s actually going to be $500.00, as ABC Investment Corp will
skim their 2.5% MER/$500.00 (the first 2.5% of 5%) right off the top, before I
even see it (standard practice in the entire industry, wouldn’t you guess), and
I’ll get a paper statement, telling me that I made/netted (the remaining)
2.5%/$500.00, on my investment this year.

Now, MERs
and gross investment returns fluctuate year to year, but, over your investing
life time (40-50 years), you will give up in MERs, 40 to 50% of your gross
profits to the (crooked) investment firm.

This, is the
white elephant in the room; your corporatized investment guru will not explain
to you in detail, unless pressed, very hard. But, you will find it all explained
in legalese, in the very fine print in the contractual paper work you signed
with them.

Why will the
vast majority of investment managers steer you toward ‘actively managed’ funds
?Because they charge a (much)
higherMER of 2.5, 3.0, 3.5%.And if you didn’t know any better you’d say,
“Geez, 3% (three dollars) for every one hundred I make is pretty good ! But now
you know better…

It’s the FIRST
3%[STUPID]of your 6% = 50%

They will
tell you, that we charge a higher MER for ‘actively managed funds, because we
have hundreds of professionally trained investors who spend all days combing
the world, ‘actively managing’ your funds, to get you the best possible
returns….to beat the markets, to beat the TSX, the S&P 500, etc…They are ‘stirring the pot’. And with each
stir, your MER goes up a fraction of a percent.

The 2nd elephant in the room,

Is that
‘actively managed funds’ (by ‘professionals’) RARELY outperform the markets
[the TSX, the S&P 500, etc…). In fact, they normally underperform them; but,
you get to pay more for that privilege.

This, is
much better than an actively managed fund, as is plainly obvious. Many Index
funds cost well below a 1% MER; many are in the .5%, .75% range. It takes a bit
of digging and persistence.

Index funds
can charge a lower MER, because instead of a pool of professionals trying to
stir the pot, to beat the markets, a computer, simply tracks the performance (or
Index) of the particular stock market.

I spent a
decade+ paying 'Investor' Company MERs to manage my RRSPs, invested in
actively managed funds, paying them well above 3%.Keep in mind that Canada has on average, the
highest MERs in the known world, and 'Investors' Company charges some of the
highest in Canada. After all, they have to pay themselves some fairly high
wages, and pay for all of those Cable TV ads that are continuously spewing
forth.

Once I
realized, that 3.5% meant the FIRST 3.5%, I asked my 'Investor' Company guru, if
Investor Company offered RRSP investing in Index Funds. The initial answer was a
non-answer, in that he simply informed me that “ He was convinced that he had us best positioned for
our long term interests ”.

So, I when
back to him and specifically asked, “Does 3.5% meant the FIRST 3.5% ? “. And,
to his credit, he answered, “Yes.” .

I expressed
my amazement; and he was quick to point out, that a decade+ or so previously, I
had signed a piece of paper, where it was explained and thus I had legally
acknowledged, acknowledging that it’s ‘the first…’ and not $3.50 for every
$100.00

To this day,
I still have a hard time wrapping my brain around this concept. Had my
Investor Company guru, precisely explained this concept in language I would
have understood…my immediate response
would have been, “are you out of your mind ?I’m going to effectively pay you between 30 and 50% of my profits, so
that you can stir the pot, vainly trying to beat the market averages ?I don’t think so, would have been my reply.

Through the
majority of that decade+, I was netting roughly 6% on any given year. With my
MERs in the 3.4% range, (meaning I was grossing 9.4%) you can see that I was
paying Investor Company, approx. 35% of my profits to active manage my
‘portfolio’ (such a fancy smancy word)(Remember, ‘actively manage’ means they are professionals…) and through
all of this, they were doing neither no better, nor any worse than ‘average’.

It was this
35% that was missing, and that gave me a ‘feeling’ in my monthly investment
statements, that something was not adding up…

The third elephant in the room,

Is that you
get a monthly statement that gives you the overall value of your investments
generally in what is calleda ‘UNIT
VALUE’ ; this unit value fluctuate within the stock markets, up and down, each
day, month, year… So as markets fluctuate, and your focused on the unit value,
attempting to track whether your making any money or not, your somewhat oblivious
to the(in my case) 35% of my profits
that were getting skimmed off without my knowledge; Because I did not really
understand what an MER was, and I certainly did not understand, that an MER of
3%, meant the FIRST 3%. My bad.

Thus, I
should have been invested in ‘passive’ Index tracking funds, (which I am now
with a different investing firm, thank you very much) being charged something
in the1 -1.5% range, and I would have
still grossed 9.4%, BUT, netted out,making on average 7.9% profit.

Netting a
profit of 7.9% is significantly better than 6%, especially over the long term.

It’s not
just 6%, you can now understand that it works out to 40-50%, depending on your
circumstances, your gross profits and the (transparent/unseen) MER you’re
paying some guy in short pants, the in the vast majority of cases, match, if you’re
lucky, what the market is performing at,all by itself.

So, having
gone through this I hope and trust that I’ve been able to clearly explain that
the charged MER is the slice in percentage points that the investing advising
guru, takes directly off your gross gains, before you see it. (and you have to
figure, there is a very very good reason [for them] that they do this…it
assists in keeping you, the chump, ignorant).

If the MER
is 2%, (as it is commonly with actively managed funds)and I gross 6% (not
uncommon in today’s 2014/15 investing climate), your investing company takes
the FIRST 2% of gains, leaving you with the remaining 4%; This means you’re
giving them (in this case) 33% of your profits.

THIRTY THREE
PERCENT ! That, IMHO, is highway robbery and should be a criminal offence.

These MERs
in my case were what is called ‘front end loaded’ funds, in that the MER is
taken off at the front end, ‘before’ I see my net gains…Some funds are ‘rear end’ loaded. Some funds
have additional charges every time they ‘stir the pot’, moving your money
between investments, or between funds.

Statistics
over the long term, (YOUR long term investing of 30-40-50 years) have shown
that with actively managed funds, the MERs eat up 40 to 50% of gains.

Over the
short term, you may not notice much of an effect. (I did, and that’s why I
started asking questions.But it took 10 years for me to catch on !) However
comma, over the long term, this can and does mean, that instead of netting out
with a $250,000.00 retirement fund (with an Index fund charging a 1% [or
better] MER), you’re going to end up with 130,000.00 – 150,000.00 .

Yes, a ONE
HUNDRED THOUSAND+DOLLAR DIFFERENCE,
over a lifetime of investing.

That ladies
and gentlemen, is going to translate in a huge difference; in the monthly
‘annuity’ you eventually create from that money, to finance your retirement.

Now, you
know better.

I have spent
considerable time on the internet, looking for papers/web sites/authors, that
explain this phenomenon if it being the first XX % of your gross profits,
without a lot of success. You can imagine that it’s not in any investment
advisors interest to be completely transparent about it, is it. They stand to
make more money from your/our ignorance.

Let me say that it is not just
Investor’s Group that enables ignorant clients, it’s the entire industry. They
[all of them] will claim that they have a financial gain to make, from being
completely forthright, open, and transparent. After all, if they make you
money, you will stick around, recommend them to others. That’s how the ‘grow
the business’.

I submit, they grow the business,
the profit margin, from keeping clients ignorant. IMHO, it highway robbery with
a smile on their face. It is unfortunately, perfectly legal, thus making them
nice guys in a shirt and tie. They will make the average schumk 200K in long
term profits. However comma, what they will not tell you is to walk down the
street, and invest in an Index Tacking Fund, paying a .5% MER, and thus making
an additional 150K.

The few
sites that have broached the subject, do so in language that often obfuscates
the message. And as you can now appreciate, the message is initially beyond
belief and comprehension. It took me a few days of saying, “it can’t be” to
figure it out.

Additional
opinions on this subject (complete with charts & graphs on the subj):

I encourage you to forward this to everyone you know who has set up a retirement fund, so that it becomes common knowledge. The financial industry presently has legal licence to fleece the world, as long as we are ignorant.

I've since been informed that if you get your Investor's guy drunk, you can actually get them to admit that no one, none of the 'active management' dudes, actually have thier own money in actively managed fundds. They have all thier money in Index Funds. Who wudda thought ?